U.S. Economy: Inflation Measure Rises, Manufacturing Stalls

Checkout counters at a Wal-Mart in New Jersey. Photographer: Stephen Wilkes

July 15 (Bloomberg) -- A measure of consumer prices climbed
more than forecast in June and manufacturing stalled,
highlighting the dilemma faced by Federal Reserve policy makers
as they seek to boost growth without stoking inflation.

Consumer prices excluding food and energy climbed 0.3
percent for a second month, the biggest back-to-back gain in
three years, the Labor Department said today in Washington.
Factory production was unchanged last month, data from the Fed
showed.

An unexpected decline in consumer sentiment, also reported
today, signaled that households are being squeezed by mounting
unemployment, rising costs and a slumping housing market. At the
same time, the pickup in prices makes it more difficult for the
Fed to adopt fresh measures to spur growth.

“There’s little additional action that the Fed can take
right now,” said Dean Maki, chief U.S. economist at Barclays
Capital Inc. in New York. “The critical issue is whether
consumer spending improves or stays quite weak.”

The Standard & Poor’s 500 Index rose 0.6 percent to
1,316.14 at the 4 p.m. close in New York. The yield on the 10-year Treasury note fell to 2.91 percent from 2.95 percent late
yesterday.

The Thomson Reuters/University of Michigan preliminary
index of consumer sentiment decreased to 63.8, the lowest
reading since March 2009, from 71.5 the prior month. The gauge
was projected to rise to 72.2, according to the median forecast
of economists surveyed by Bloomberg News.

Additional Action

Fed Chairman Ben S. Bernanke told Congress this week that
the central bank is prepared to take additional action,
including buying more government bonds, if the economy appears
to be in danger of stalling.

“We have to keep all the options on the table,” Bernanke
said in semi-annual testimony to the House Financial Services
Committee. The “economy still needs a good deal of support.”

At the same time, Bernanke said there is also the
possibility that inflation could pick up in a way that would
require the Fed to begin tightening credit and exit its record
monetary stimulus.

The biggest drop in energy costs since 2008 masked growing
inflation in other goods and services like autos, clothing and
hotel rates, today’s Labor Department report showed. Including
food and energy, the consumer-price index decreased 0.2 percent,
the first drop in a year, compared with the 0.1 percent drop
forecast by economists.

Apparel costs jumped 1.4 percent, the biggest surge since
March 1990. Lodging away from home, which includes hotel rates,
soared 3 percent after a 2.9 percent gain in May, while the cost
of a new car increased 0.6 percent.

It’s too early to predict how consumers will react to
increased prices, according to Levi Strauss & Co. Chief
Financial Officer Blake Jorgensen. Levi Strauss, the closely
held maker of blue jeans and Dockers pants, boosted prices in
the first three months of the year as cotton costs soared.

Food, Gasoline

“We haven’t seen the full impact of apparel prices on the
consumer,” Jorgensen said in a July 12 call with analysts.
“When you combine that with some of the continued pressure with
the consumer on general products, food, gas, commodities that
they are experiencing and no job growth, we’re still cautious
here in the U.S.”

Bernanke told Congress this week that “most of the recent
rise in inflation appears likely to be transitory.”
Stabilization of oil prices and other commodities, along with
slack in the labor market, indicates inflation will moderate,
Bernanke said.

Fed policy makers aim for long-run overall inflation of 1.7
percent to 2 percent, according to their June forecast. Their
preferred price gauge, which excludes food and fuel, rose 1.2
percent in May from a year earlier.

The jump in auto prices may reflect shortages in parts
caused by the tragedy in Japan, indicating costs may level off
as the imbalances are corrected, economists said.

Auto Parts

“We will have sufficient auto parts later in the year and
oil prices are coming down, so that impulse on core prices will
fade,” Kevin Harris, chief economist at Informa Global Markets
in New York, said before the report.

Manufacturing, which accounts for about 12 percent of the
economy, may be restrained by slower consumer demand and a
buildup in inventories even as automakers rebound from parts
shortages after the Japan earthquake.

Toyota Motor Corp. and Honda Motor Co.’s U.S. deliveries
each fell 21 percent in June from a year earlier, while General
Motors Co. and Ford Motor Co. saw sales gain 10 percent, less
than estimates, according to industry data on July 2.

“When considering the headwinds that we faced this month,
June was fairly decent, comparing it year-over-year,” GM’s vice
president for U.S. sales Donald Johnson said on a conference
call July 1.